Challenges Abound for No-Moat Treehouse Foods, but We See Reason for Optimism in 2022

No-moat Treehouse Foods continues to experience numerous challenges, including consumers’ shift away from private-label (although we view this as temporary, pandemic-related phenomenon), widespread inflation, and supply chain disruption. We plan a mid-single-digit percentage reduction to our $53 fair value estimate, as we adjust our credit risk assessment to above average from moderate, as the firm’s net debt/adjusted EBITDA spiked to 4.2 times at year-end. While this is uncomfortably close to the 4.5 times limit imposed by its lending covenants, we are pleased that management has negotiated an amendment with its lenders, which should be finalized Feb. 14. We increase our cost of debt assumption for Treehouse by 150 basis points to 8.0%, taking our weighted average cost of capital estimate to 7.0% from 6.4%. This adjustment more than offsets the 5% boost to Treehouse’s intrinsic value from the reversal of our prior assumption that the U.S. corporate tax rate will increase in 2022. Despite an 8% pop in the stock on the report, shares appear undervalued, trading at a 25% discount to our revised valuation.